Cornelius Adablah (PhD) | David Ackah (PhD)
The Bank of Japan has recently decided that it will cut its rate below the zero percent mark. Bank of Canada has also hinted that it may also join the Bank of Japan in this extreme step and drop its interest rates below zero as well. However, most average people in the world are dumbfounded at the concept of negative interest rates. Nobody really understands what they are and how they might help! In this article, we will explain the concept of negative interest rates in detail. A negative interest rate is a strange scenario in which theoretically banks will have to pay their borrowers negative interest. It is a strange system wherein borrowing money is a financially wiser thing to do than saving it. Savers will lose money when they deposit it in a bank. Then this same money will be transferred to the borrowers. This idea is very difficult to understand given the fact that everything associated with it looks bizarre. Theoretically there are two types of interest rates, simple and compounding. However, in finance the word interest usually refers to compound interest. Simple interest almost never factors in financial calculations. In all calculations related to present values and future values, compound interest is used. However, as a student of corporate finance, it is essential to know the difference that compounding intervals have on the effective interest rate that is paid on the investment.
Keywords: Compounding Intervals, Interest Rate, Negative Interest Rates